Weaker Demand Business Parks Weigh Industrial Rents Growth Slowing 1 Q O Q 2Q2024

According to JTC’s latest quarterly market report, the industrial sector recorded a 1% increase in rents quarter-on-quarter (q-o-q) in 2Q2024, which is a slowdown from the 1.7% growth in the previous quarter. This marks the slowest rate of rental growth since 1Q2022, following the post-Covid recovery. On a yearly basis, rents grew by 6.6% in 2Q2024 compared to the 7.8% growth recorded in the same period last year.

Chua Yang Liang, head of research and consultancy for Southeast Asia at JLL, attributes the slow quarterly rental growth to weaker demand for business park space. Rents for business parks dipped marginally by 0.1% in 2Q2024, a significant slowdown from the 2.1% growth seen in 1Q2024. JTC data also shows that the business park vacancy rate declined slightly to 21.7% in 2Q2024 from 22% in the previous quarter.

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Tricia Song, head of research for Southeast Asia at CBRE, highlights the “patchy” performance of business parks, with the average vacancy rate in one-north at 9% in 2Q2024, around 30% at Changi Business Park in the east, and close to 40% at International Business Park in Jurong in the west.

Increased pressure expected on business park rents

It is expected that business park rents will face increased pressure in the latter half of the year, as non-renewals on lease expiry in specific buildings will lead to a spike in vacancy. A higher volume of completions in 2H2024 to 2025 will also contribute to a more competitive leasing environment. CBRE’s Song points out that “the prevailing economic challenges, high-cost environment, and continued work-from-home measures will continue to dilute occupiers’ space requirements.”

Leonard Tay, head of research at Knight Frank Singapore, believes that business park rents have been dragged down by older business parks in the east and west of Singapore, which have come under pressure. On the other hand, he observes that business parks that have immediate connectivity to MRT stations and are centrally located typically enjoy higher occupancies and command higher rents.

Occupiers becoming increasingly cost-sensitive

In the warehouse segment, rents increased by 0.5% q-o-q, showing a decline in momentum from last quarter’s 2% growth. Amid steady demand and the absence of major warehouse completions during the quarter, the occupancy rate increased by 0.2 percentage points to 91.3%. While the warehouse segment continues to experience resilient occupancy rates, logistics occupiers are becoming increasingly cost-sensitive and resistant to higher rents, according to CBRE.

“The cost pressures can be partly attributed to the Red Sea crisis,” says Song, referring to the detours taken by vessels to avoid Houthi attacks, which have led to escalated freight rates and port congestions in Singapore, adding to supply chain challenges for logistics operators. She adds that despite these challenges, landlords still remain keen on redevelopment opportunities that seek to convert traditional warehouse developments into prime logistics facilities.

Overall industrial rents rose due to the continued strong demand for multi-user factories, which saw growth of 1.5% q-o-q, accelerating from the previous quarter’s growth of 1.3%. This resulted in a tight vacancy rate of 8.7% for the segment, the lowest since 1Q2012, according to JLL’s Chua.

Prices of industrial spaces also increased by 1.2% q-o-q in 2Q2024, reversing the 0.2% decline in 1Q2024. The price gain was led by the multi-user factory segment, which saw an increase of 1.7%. This is the strongest quarterly growth since 1Q2023, says Lee Sze Teck, senior director of data analytics at Huttons Asia. He attributes the growth in the JTC price index to investors looking for better yields.

Demand for industrial space on the rise

Demand for industrial space increased by 2.78 million sq ft in 2Q2024. This was supported by the recovery in the manufacturing sector, which expanded by 0.5% year-on-year (y-o-y) in 2Q2024, reversing the negative annual growth recorded in the previous quarter, based on advanced estimates from the Ministry of Trade and Industry. Demand exceeded the quarter’s supply, resulting in a rise in occupancy rates across all segments to 89% in 2Q2024, up 0.3% q-o-q, says JTC.

CBRE’s Song notes that leasing demand was driven by technology and manufacturing companies, which continue to seek high-spec facilities for their production capabilities. This is also reflected in the sharp increase of industrial property transactions by 42.1% q-o-q to 516 in 2Q2024, particularly in the multi-user factory and warehouse segments. The largest strata sale of a multi-user factory in 2Q2024 was a 13,423 sq ft freehold unit in Amtech Building on Sin Ming Road, which was sold for $12.5 million ($931 psf).

As of the end of June, about 8.61 million sq ft of new industrial space is expected to be completed in 2H2024. This is lower than the average annual supply of 9.69 million sq ft in the last three years. Another 18.3 million sq ft of industrial space is expected to come onstream in 2025. Considering the new supply in the pipeline, JTC expects occupancy rates to remain stable for the rest of the year.

Stable market expected for the rest of 2024?

According to the latest Singstat survey (2024), manufacturing businesses and firms in Singapore are less confident about prospects in the immediate term. “Given the economic weaknesses in Europe and China, businesses are naturally less sanguine,” says Chua from JLL.

However, Chua believes that the global trade fragmentation caused by the US-China trade war should continue to benefit Asia, which could bring further upside to industrial activity in Southeast Asia, including Singapore, as more firms position themselves to take advantage of regional trade. He also notes that an upside in manufacturing and trading activity in Singapore in the second half of 2024 could support the demand for industrial space despite the expected large supply completion. As such, he predicts that rents are likely to remain stable in the future.